FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud
A trader whose bonus is entirely tied to annual profit hides losses in an error account. When questioned, he tells himself, 'I am only borrowing from next year's gains, and the bank would do the same.' Which pairing correctly identifies the fraud triangle elements shown?
The bonus linked entirely to profit creates pressure to hide losses, and the trader's belief that he is merely borrowing from future gains is rationalization. The error account provides the opportunity, so the pairing of pressure with the bonus and rationalization with the belief is correct.
- APressure from the bonus structure; rationalization through the 'borrowing' beliefCorrect
- BOpportunity from the bonus structure; pressure through the 'borrowing' belief
- CRationalization from the bonus structure; opportunity through the 'borrowing' belief
- DPressure from the error account; opportunity through the 'borrowing' belief
Explanation
Bonus tied solely to profit creates incentive or pressure to conceal losses. The self-justification that he is merely borrowing is rationalization. The error account is the opportunity, so other pairings misassign the elements.
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